Wednesday, May 26, 2010

ABB Open Offer : Would you buy NOW?

Promoter of ABB Ltd have offered to buy 48.51 million shares, or 22.89%, in the firm from shareholders at Rs 900, a 8.8% premium to CMP of Rs 826.

The offer by ABB Asea Brown Boveri Ltd and ABB Ltd (Switzerland) will launch on July 8 and will close on 27 July, HSBC Securities and Capital Markets said.
ABB Asea Brown Boveri Ltd and its unit ABB Norden Holding AB together holds 52.11% in ABB Ltd, the advertisement said.

Back of the envelope calculation:
Is their any arbitrage available or should one buy taking open offer into consideration?

  • ABB current price = Rs 826 e.g. 100 shares are bought.
  • Currently ABB holds 52.11% and it has offered to buy 22.89% more which would take their stake to 75% in India unit. So it makes a 47.8% probability that our shares would get tendered in Open Offer.
  • So if one buys 100 shares, approximately 48 would go into open offer and he will get payout @ Rs 900/share.
  • Net Profit on tendered shares = (Rs 900 - Rs 826) X 48 = Rs 74 X 48 = Rs 3552/-
  • Net Profit = 4.3% on total capital invested, decent returns for holding period of around 2.5 months!
But history tells us something else -
RANBAXY shareholders were given a similar open offer which was way above its market price at that time and it was at Rs 737/share from Dai Ichi Sankyo of Japan while shares were ruling at Rs 550 at time of announcement. The stock has never risen to those levels now almost 2 years have passed, those who bought in anticipation of open offer got payout for small number of shares and larger part of holdings is still stuck.

Then why do foreign companies give open offers?

  • They are investing in businesses and not at all interested in small short term gains, they think of 5-10 years in advance minimum and bet on future of the economy which a common retail investor doesn't do.
In case of ABB the open offer price looks really stretched as the company is already trading at a P/E multiple of 62 and at Rs 900 it would go beyond 67 which is not at all cheap by any stretch of imagination.
  • ABB has reported an average decline of 34.5% in profits for the past four quarters ended December 2009. The performance has taken a further sharp blow in the March 2010 quarter, with profits falling by 92%. The company’s financial performance has been disappointing mainly due to its exit from a key business segment, delays in some of the projects and fluctuation in input prices.
  • Company imports nearly 40% of its raw material requirement and is exposed to a large foreign exchange risk, it has to follow an active hedging policy which may be lacking so far. Recent rupee appreciation may hurt financials more.
  • The probability of giving shares in open offer may go down also as public holding currently stands at less than 15%, which means that the company would have to convince the institutional investors, who hold a total of around 33%, to respond to the offer.
  • Looking at company prospects in immediate future and history of similar open offer it looks wise to take profits at Current market price or have small exposure as stock may fall after the event is over. Even an 8% drop from current levels would take the investor into losses if one buys from the viewpoint of open offer now. If parent doesn't have intentions of de-listing, profit for the investor is not guaranteed by any Open Offer.

No comments: